Lately, international investing, particularly emerging market investing, has been pretty poor. It's hard to believe that, only two years ago, investors poured more than $16 billion into various emerging market mutual funds and exchange products. But then, the global slowdown came and growth, as well as stocks, have plummeted.

IN PICTURES: Top 10 Forex Trading Rules

While the recent market rallies have brought some of these assets back, the
iShares MSCI Emerging Markets Index ETF (NYSE:EEM), the major proxy for these markets, is still well off of its highs. This has led to the questioning of the theory of decoupling. Emerging markets, at one time, offered low correlation to the developed world. However, as these nations grew in prosperity, their fortunes became inter-twined with global economy. For example, China is now the United States' second largest trading partner, contributing $387 billion worth of trade. China will continue to grow and prosper over the upcoming decades, and long-term investors should plan according in their portfolios. The real question is, where the next "Chinas" are, and is there a way to participate in their growth?

Finding the Next China
Wall Street calls these emerging markets that have not fully emerged, "frontier economies." They include such nations as Peru, Nigeria, Croatia and Kazakhstan. Typically, these frontier environments are characterized by very fast growing economies combined with very small or hardly-existent equity markets. For example, at the Ugandan Securities Exchange, the average daily volume in terms of dollars is only around $200,000. Add this to the often unstable political environments, and you have reason why these aren't tourist hot spots.

But there are many positives to these frontier markets - many are rich in natural resources. As the long term global demand for oil, natural gas, gold and other commodities continues to increase, the prospects for growth in these nations is promising. In addition, frontier markets provide the low correlations that places like China and India used to provide. Comparing the three major international indexes, The MSCI World Developed, MSCI Emerging and S&P Frontier, to the S&P 500, we see that correlations are as follows, 0.95, 0.69 and 0.20, respectfully. (For more, see Go International With Foreign Index Funds.)

How to Capitalize on that Growth
While there are a few frontier market ADR's trading on major U.S. exchanges, such as South Africa's Sasol Limited (NYSE:SSL), most do not. Creating an allocation to these assets using individual stocks would be most daunting. For most investors, an index exchange product or actively managed mutual fund is a better choice. These can provide exposure to several different frontier markets, across several different sectors.

The oldest exchange traded fund in this sector is the Claymore/BNY Mellon Frontier Markets (NYSE:FRN). It also follows the broadest index, covering nations in South America, Asia, Africa and Eastern Europe. Currently, the fund contains 34 holdings equally spread across sectors with financials making up 28%. Companies within the ETF range from the semi-familiar and U.S. listed Chemical & Mining Co. of Chile Inc. (NYSE:SQM), and gold miner, Compania de Minas Buenaventura SA (NYSE:BVN), to the exotic Orascom Construction Industries of Egypt. The only troubling issue with the Claymore fund is that nearly 35% of the assets are located in Chile, and about 20% are located in Poland. While both Chile and Poland are great candidates for the next "emerging market of tomorrow," it may be disadvantageous to have over 50% of assets in two countries. Time will tell. The ETF charges 0.65% in expenses. (For more, see Five Ways To Find A Winning ETF.)

The remaining ETF's in the sector focus on the continent of Africa. The PowerShares MENA Frontier Countries ETF (NASDAQ:PMNA) concentrates its holdings in the oil and energy rich Middle East, comprising of investment in Egypt, Morocco, Oman, Lebanon, Jordan, Kuwait, Bahrain, Qatar and United Arab Emirates. The appeal of the area is that energy-driven profits will spur growth in other areas, including infrastructure and healthcare. Analysts estimate that these nations will generate an oil surplus of $1.1 trillion - equal to about $30 million per resident. The fund currently holds 33 holdings with a surprising 50% weighting towards financials. (For more, see Finding Fortune In Foreign-Stock ETFs.)

The Bottom Line
For investors with a long term (possibly decades long) timeline, Frontier markets may make sense. These emerging nations of tomorrow offer significant growth potential for investors willing to take the risks. These could be the China's and Brazil's of the future. The two previous ETFs offer a broad way to wade into the sector and gain from that growth. (To learn more about ETFs, see our Exchange Traded Funds Tutorial.)

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center